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Sunk Costs and Real Options in Antitrust

Robert S. Pindyck

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

June 2005

MIT Sloan Working Paper No. 4545-05

Sunk costs play a central role in antitrust economics, but are often misunderstood and mismeasured. I will try to clarify some of the conceptual and empirical issues related to sunk costs, and explain their implications for antitrust analysis. I will be particularly concerned with the role of uncertainty. When market conditions evolve unpredictably (as they almost always do), firms incur an opportunity cost when they invest in new capital, because they give up the option to wait for the arrival of new information about the likely returns from the investment. This option value is a sunk cost, and is just as relevant for antitrust analysis as the direct cost of a machine or a factory.

Number of Pages in PDF File: 31

Keywords: Sunk costs, real options, investment decisions, antitrust, entry barriers, market power, mergers

JEL Classification: L40, L10, D43

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Date posted: June 13, 2005  

Suggested Citation

Pindyck, Robert S., Sunk Costs and Real Options in Antitrust (June 2005). MIT Sloan Working Paper No. 4545-05. Available at SSRN: http://ssrn.com/abstract=742505 or http://dx.doi.org/10.2139/ssrn.742505

Contact Information

Robert S. Pindyck (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
50 Memorial Drive, E52-450
Cambridge, MA 02142
United States
617-253-6641 (Phone)
617-258-6855 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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